An e-mail in response to Friday’s post on Fannie and Freddie:
You might add this to your excellent analysis of the Fannie/Freddie situation.
From Obama’s own website:
Barack Obama will create an Affordable Housing Trust Fund to develop affordable housing in mixed-income neighborhoods.The Affordable Housing Trust Fund would use a small percentage of the profits of two government-sponsored housing agencies, Fannie Mae and Freddie Mac, to create thousands of new units of affordable housing every year.
A “small percentage” here, small percentage there. Pretty soon we’re talking real money. Or, to put it another way: pretty soon Wall Street notices what’s going on.
Over the weekend I spoke to a conservative expert on the GSEs, and to my surprise he said he likes it when Congress imposes special taxes on their profits. “I have always been for privatizing Fannie Mae and Freddie Mac, and the only time Congress will do it is if Fannie and Freddie want Congress to do it,” he said. He said he hopes special taxes like the one in the housing bill “incline them further toward privatizing themselves.”
I don’t think that’s likely to happen, though. True independence from the government would mean that the GSEs would have to start paying regular federal and state taxes. It would also mean that they might lose the government’s “implicit guarantee” of their liabilities, which allows them to borrow cheaply and expand endlessly without really worrying about the risks. Julie Creswell of the New York Times had an article up yesterday that looked at the GSEs lobbying machine and found that it’s gotten them a pretty sweet deal:
In Washington, Fannie and Freddie’s sprawling lobbying machine hired family and friends of politicians in their efforts to quickly sideline any regulations that might slow their growth or invite greater oversight of their business practices. Indeed, their rapid expansion was, at least in part, the result of such artful lobbying over the years.
And as Fannie and Freddie grew, so did the fortunes of Wall Street, which reaped rich fees from issuing debt for the two companies, as well as the mortgage and housing industries, which banked billions of dollars as the housing market boomed.
Even after accounting scandals arose at the two companies a few years ago, attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses.
The Washington Post has a similar piece up today, and both pieces are worth reading in full.
Some might point to the housing bill that just passed the Senate as a sign that Congress is finally cracking down on Fannie and Freddie. But even though the bill creates a new regulator for the GSEs and confiscates a portion of their profits to fund a broader bailout for subprime borrowers, it also raises the limits on the size of the mortgages they can buy, which is something they’ve been pushing for hard. As the Editors write in today’s editorial, “Congress should be winding Fannie and Freddie down, not expanding the scope of their activities.”